,
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: September 30, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-36746
PARAMOUNT GROUP, INC.
(Exact name of registrant as specified in its charter)
Maryland
32-0439307
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
1633 Broadway, Suite 1801, New York, NY
10019
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (212) 237-3100
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class
Trading Symbol
Name of each exchange on which registered
Common stock of Paramount Group, Inc.,$0.01 par value per share
PGRE
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated Filer
Non-Accelerated Filer
Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 15, 2021, there were 218,956,406 shares of the registrant’s common stock outstanding.
Table of Contents
Item
Page Number
Part I.
Financial Information
Item 1.
Consolidated Financial Statements
Consolidated Balance Sheets (Unaudited) as of September 30, 2021 and December 31, 2020
3
Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, 2021 and 2020
4
Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2021 and 2020
5
Consolidated Statements of Changes in Equity (Unaudited) for the three and nine months ended September 30, 2021 and 2020
6
Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2021 and 2020
8
Notes to Consolidated Financial Statements (Unaudited)
10
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
29
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
61
Item 4.
Controls and Procedures
63
Part II.
Other Information
Legal Proceedings
64
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Item 6.
Exhibits
65
Signatures
66
2
PART I – FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Amounts in thousands, except share, unit and per share amounts)
September 30, 2021
December 31, 2020
Assets
Real estate, at cost:
Land
$
1,966,237
Buildings and improvements
6,031,662
5,997,078
7,997,899
7,963,315
Accumulated depreciation and amortization
(1,069,433
)
(966,697
Real estate, net
6,928,466
6,996,618
Cash and cash equivalents
494,569
434,530
Restricted cash
27,977
30,794
Investments in unconsolidated joint ventures
405,391
412,724
Investments in unconsolidated real estate funds
12,225
12,917
Accounts and other receivables
11,385
17,502
Deferred rent receivable
338,165
330,239
Deferred charges, net of accumulated amortization of $66,029 and $56,612
115,658
116,278
Intangible assets, net of accumulated amortization of $249,580 and $283,332
127,529
153,519
Other assets
84,220
48,976
Total assets (1)
8,545,585
8,554,097
Liabilities and Equity
Notes and mortgages payable, net of unamortized deferred financing costs
of $23,555 and $18,695
3,834,445
3,800,739
Revolving credit facility
-
Accounts payable and accrued expenses
117,758
101,901
Dividends and distributions payable
16,897
16,796
Intangible liabilities, net of accumulated amortization of $108,249 and $107,981
47,855
55,996
Other liabilities
65,413
62,931
Total liabilities (1)
4,082,368
4,038,363
Commitments and contingencies
Paramount Group, Inc. equity:
Common stock $0.01 par value per share; authorized 900,000,000 shares; issued and
outstanding 218,956,406 and 218,817,337 shares in 2021 and 2020, respectively
2,189
2,188
Additional paid-in-capital
4,117,939
4,120,173
Earnings less than distributions
(524,717
(456,393
Accumulated other comprehensive loss
(6,730
(12,791
Paramount Group, Inc. equity
3,588,681
3,653,177
Noncontrolling interests in:
Consolidated joint ventures
435,142
437,161
Consolidated real estate fund
82,209
79,017
Operating Partnership (21,799,022 and 20,756,618 units outstanding)
357,185
346,379
Total equity
4,463,217
4,515,734
Total liabilities and equity
(1)
Represents the consolidated assets and liabilities of Paramount Group Operating Partnership LP, a Delaware limited partnership (the “Operating Partnership”). The Operating Partnership is a consolidated variable interest entity (“VIE”), of which we are the sole general partner and own approximately 90.9% as of September 30, 2021. As of September 30, 2021, the Operating Partnership includes $4,070,290 and $2,581,637 of assets and liabilities, respectively, of certain VIEs that are consolidated by the Operating Partnership. See Note 12, Variable Interest Entities (“VIEs”).
See notes to consolidated financial statements (unaudited).
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended
For the Nine Months Ended
September 30,
(Amounts in thousands, except share and per share amounts)
2021
2020
Revenues:
Rental revenue
170,851
165,420
518,625
504,834
Fee and other income
8,280
11,355
23,941
27,045
Total revenues
179,131
176,775
542,566
531,879
Expenses:
Operating
67,131
67,865
197,821
199,192
Depreciation and amortization
57,522
58,889
175,752
176,032
General and administrative
13,257
16,805
46,039
46,955
Transaction related costs
87
81
503
542
Total expenses
137,997
143,640
420,115
422,721
Other income (expense):
Income (loss) from unconsolidated joint ventures
223
(4,268
(20,810
(14,444
Income (loss) from unconsolidated real estate funds
276
(56
604
85
Interest and other income, net
138
1,104
2,510
2,360
Interest and debt expense
(36,266
(35,792
(105,919
(108,420
Income (loss) from continuing operations, before income taxes
5,505
(5,877
(1,164
(11,261
Income tax expense
(873
(393
(2,448
(1,135
Income (loss) from continuing operations, net
4,632
(6,270
(3,612
(12,396
Income from discontinued operations, net
2,147
5,815
Net income (loss)
(4,123
(6,581
Less net (income) loss attributable to noncontrolling interests in:
(3,768
(3,566
(16,924
(5,485
(3,123
79
(3,179
1,291
Operating Partnership
204
652
2,139
895
Net loss attributable to common stockholders
(2,055
(6,958
(21,576
(9,880
(Loss) Income per Common Share - Basic
Loss from continuing operations, net
(0.01
(0.04
(0.10
(0.07
0.01
0.03
Net loss per common share
(0.03
Weighted average common shares outstanding
218,706,356
221,461,146
218,689,696
223,593,376
(Loss) Income per Common Share - Diluted
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Other comprehensive income (loss):
Change in value of interest rate swaps and interest rate caps
995
Pro rata share of other comprehensive income (loss) of
unconsolidated joint ventures
928
904
5,677
(15,453
Comprehensive income (loss)
6,555
(3,219
3,060
(22,034
Less comprehensive (income) loss attributable to noncontrolling
interests in:
75
(3,191
1,283
30
575
1,541
2,319
Comprehensive loss attributable to common stockholders
(306
(6,135
(15,514
(23,917
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Accumulated
Noncontrolling Interests in
Additional
Earnings
Other
Consolidated
(Amounts in thousands, except per share
Common Shares
Paid-in-
Less than
Comprehensive
Joint
Real Estate
Total
and unit amounts)
Shares
Amount
Capital
Distributions
Loss
Ventures
Fund
Partnership
Equity
Balance as of June 30, 2021
218,962
4,113,889
(507,321
(8,478
442,428
79,085
358,331
4,480,123
Net (loss) income
3,768
3,123
(204
Common shares issued under Omnibus
share plan, net of shares withheld for taxes
(6
(14
Dividends and distributions ($0.07 per share
and unit)
(15,327
(1,570
(16,897
Distributions to noncontrolling interests
(11,054
Change in value of interest rate swaps and
interest rate caps
905
90
Pro rata share of other comprehensive income
of unconsolidated joint ventures
843
1
84
Amortization of equity awards
305
3,928
4,233
Reallocation of noncontrolling interest
3,474
(3,474
271
Balance as of September 30, 2021
218,956
Balance as of June 30, 2020
221,764
2,219
4,133,542
(397,220
(15,031
436,183
79,243
348,740
4,587,676
3,566
(79
(652
Common shares issued upon redemption of
common units
24
399
(399
(10
(2
Repurchases of common shares
(1,233
(12
(8,508
(8,520
Dividends and distributions ($0.10 per share
(22,060
(2,113
(24,173
(3,173
823
77
292
4,252
4,544
2,762
(2,762
Balance as of September 30, 2020
220,545
2,205
4,128,487
(426,238
(14,208
436,576
79,168
347,143
4,553,133
Balance as of December 31, 2020
218,817
16,924
3,179
(2,139
165
(165
129
(215
(214
Dividends and distributions ($0.21 per share
(45,981
(4,702
(50,683
Contributions from noncontrolling interests
121
(19,616
5,156
13
508
916
13,628
14,544
(3,586
3,586
(552
552
Balance as of December 31, 2019
227,432
2,274
4,133,184
(349,557
(171
360,778
72,396
412,058
4,630,962
5,485
(1,291
(895
5,150
51
85,659
(85,710
53
(319
(318
(12,090
(121
(108,399
(108,520
Dividends and distributions ($0.30 per share
(66,482
(6,325
(72,807
3,500
8,055
11,555
(9,530
Pro rata share of other comprehensive (loss) income
(14,037
(1,424
984
13,268
14,252
Sale of a 10.0% interest in 1633 Broadway
33,230
76,343
109,573
(16,171
16,171
7
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30,
Cash Flows from Operating Activities:
Net loss
Adjustments to reconcile net loss to net cash provided by
operating activities:
176,722
Loss from unconsolidated joint ventures
20,810
14,444
Amortization of stock-based compensation expense
14,421
14,141
Straight-lining of rental revenue
(7,925
(24,170
Amortization of deferred financing costs
7,306
6,957
Distributions of earnings from unconsolidated joint ventures
3,950
1,688
Amortization of above and below-market leases, net
(2,335
(4,653
Realized and unrealized gains on marketable securities
(1,271
(129
Income from unconsolidated real estate funds
(604
(85
Distributions of earnings from unconsolidated real estate funds
535
480
Other non-cash adjustments
2,330
231
Changes in operating assets and liabilities:
6,118
3,942
Deferred charges
(12,664
(10,116
(30,014
(36,068
12,830
2,827
2,433
(61
Net cash provided by operating activities
188,060
139,569
Cash Flows from Investing Activities:
Additions to real estate
(74,134
(60,348
Purchases of marketable securities
(21,562
(12,207
Sales of marketable securities
18,305
19,049
Contributions of capital to unconsolidated joint ventures
(11,750
Distributions of capital from unconsolidated real estate funds
3,959
Contributions of capital to unconsolidated real estate funds
(3,198
(2,945
Repayment of amounts due from affiliates
36,918
Net cash used in investing activities
(88,380
(19,533
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Cash Flows from Financing Activities:
Proceeds from notes and mortgages payable
888,566
9,791
Repayment of notes and mortgages payable
(850,000
Dividends paid to common stockholders
(45,970
(67,165
Debt issuance costs
(10,593
Distributions paid to common unitholders
(4,612
(6,724
Repurchase of shares related to stock compensation agreements
and related tax withholdings
Purchase of interest rate caps
(140
Borrowings under revolving credit facility
163,082
Proceeds from the sale of a 10.0% interest in 1633 Broadway
111,984
Repayment of note payable issued in connection with the acquisition of
noncontrolling interest in consolidated real estate fund
(8,771
Net cash (used in) provided by financing activities
(42,458
95,384
Net increase in cash and cash equivalents and restricted cash
57,222
215,420
Cash and cash equivalents and restricted cash at beginning of period
465,324
331,487
Cash and cash equivalents and restricted cash at end of period
522,546
546,907
Reconciliation of Cash and Cash Equivalents and Restricted Cash:
Cash and cash equivalents at beginning of period
306,215
Restricted cash at beginning of period
25,272
Cash and cash equivalents at end of period
515,942
Restricted cash at end of period
30,965
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest
98,917
102,379
Cash payments for income taxes, net of refunds
970
1,440
Non-Cash Transactions:
Dividends and distributions declared but not yet paid
24,173
Additions to real estate included in accounts payable and accrued expenses
17,842
14,644
Write-off of fully amortized and/or depreciated assets
43,232
8,677
Common shares issued upon redemption of common units
85,710
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization and Business
As used in these consolidated financial statements, unless otherwise indicated, all references to “we,” “us,” “our,” the “Company,” and “Paramount” refer to Paramount Group, Inc., a Maryland corporation, and its consolidated subsidiaries, including Paramount Group Operating Partnership LP (the “Operating Partnership”), a Delaware limited partnership. We are a fully-integrated real estate investment trust (“REIT”) focused on owning, operating, managing, acquiring and redeveloping high-quality, Class A office properties in select central business district submarkets of New York City and San Francisco. As of September 30, 2021, our portfolio consisted of 13 Class A properties aggregating 12.9 million square feet. We conduct our business through, and substantially all of our interests in properties and investments are held by, the Operating Partnership. We are the sole general partner of, and owned approximately 90.9% of, the Operating Partnership as of September 30, 2021.
In March 2020, the World Health Organization declared coronavirus 2019 (“COVID-19”) a global pandemic. The outbreak of COVID-19 caused severe disruptions in the global economy. These disruptions have adversely impacted businesses and financial markets, including that of New York and San Francisco, the markets in which we operate and where all of our assets are located. As a result, several of our tenants sought deferrals and/or short-term relief of their rental obligations and we provided relief to select tenants.
The U.S. Food and Drug Administration has approved the use of one COVID-19 vaccine and has issued emergency use authorizations of two additional vaccines for the prevention of COVID-19. The availability of these vaccines has resulted in a significant portion of the population in New York and San Francisco being vaccinated and enabled New York and San Francisco to lift most COVID-19 restrictions. Notwithstanding the vaccination success, multiple variants of the virus that cause COVID-19 continue to persist globally and in the United States. While we continue to navigate the crisis and monitor the impact of the pandemic on our business, the fluidity of the situation precludes us at this time from making any predictions as to the ultimate impact COVID-19 may have on our future financial condition, results of operations and cash flows.
2.
Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements are unaudited and have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in conjunction with the instructions to Form 10-Q of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures required by GAAP for complete financial statements have been condensed or omitted. These consolidated financial statements include the accounts of Paramount and its consolidated subsidiaries, including the Operating Partnership. In the opinion of management, all significant adjustments (which include only normal recurring adjustments) and eliminations (which include intercompany balances and transactions) necessary to present fairly the financial position, results of operations and changes in cash flows have been made. The consolidated balance sheet as of December 31, 2020 was derived from audited financial statements as of that date but does not include all information and disclosures required by GAAP. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC.
Significant Accounting Policies
There are no material changes to our significant accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.
Use of Estimates
We have made estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates. The results of operations for the three and nine months ended September 30, 2021, are not necessarily indicative of the operating results for the full year.
Recently Issued Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, an update to ASC Topic 740, Income Taxes. ASU 2019-12 simplifies the accounting for income taxes by (i) eliminating certain exceptions within ASC Topic 740 and (ii) clarifying and amending the existing guidance to enable consistent application of ASC Topic 740. ASU 2019-12 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2020, with early adoption permitted. We adopted the provisions of ASU 2019-12 on January 1, 2021. This adoption did not have an impact on our consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, which adds ASC Topic 848, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides temporary optional expedients and exceptions to ease financial reporting burdens related to applying current GAAP to modifications of contracts, hedging relationships and other transactions in connection with the transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. In January 2021, the FASB issued ASU 2021-01 to clarify that certain optional expedients and exceptions apply to modifications of derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting cash flows, computing variation margin settlements, and for calculating price alignment interest. ASU 2020-04 is effective beginning on March 12, 2020 and may be applied prospectively to such transactions through December 31, 2022 and ASU 2021-01 is effective beginning on January 7, 2021 and may be applied retrospectively or prospectively to such transactions through December 31, 2022. We will apply ASU 2020-04 and ASU 2021-01 prospectively as and when we enter into transactions to which these updates apply.
In August 2020, the FASB issued ASU 2020-06, an update to ASC Topic 470, Subtopic - 20, Debt - Debt with Conversion and Other Options, and ASC Topic 815, Subtopic - 4, Derivatives and Hedging - Contracts in Entity's Own Equity. ASU 2020-06 simplifies the guidance for certain financial instruments with characteristics of liability and equity, including convertible instruments and contracts on an entity’s own equity by reducing the number of accounting models for convertible instruments and amends guidance in ASC Topic 260, Earnings Per Share, relating to the computation of earnings per share for convertible instruments and contracts on an entity’s own equity. ASU 2020-06 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2021, with early adoption permitted for fiscal years that begin after December 15, 2020. We are evaluating the impact of ASU 2020-06 on our consolidated financial statements.
In October 2020, the FASB issued ASU 2020-10, Codification Improvements. ASU 2020-10 codifies the disclosure guidance of all codifications which provide entities with an option to either present information on the face or disclose it in the notes to the financial statements. ASU 2020-10 also clarifies application of various provisions in the codifications where the guidance may have been unclear. ASU 2020-10 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2020, with early adoption permitted. We adopted the provisions of ASU 2020-10 on January 1, 2021. This adoption did not have an impact on our consolidated financial statements.
11
3.
Discontinued Operations
Over the past three years, we sold the remaining assets in our Washington, D.C. portfolio, thereby exiting the Washington, D.C. office market. These dispositions represented a strategic shift in our operations and met the criteria for classifying our Washington, D.C. segment as “discontinued operations,” in accordance with ASC Topic 205, Presentation of Financial Statements. Accordingly, effective March 31, 2020, we reclassified the results of operations of our Washington, D.C. segment as discontinued operations.
The tables below provide the details of the results of operations and the details of the cash flows related to discontinued operations for the periods set forth below.
For the Three Months
For the Nine Months
Income Statement: (1)
Ended September 30, 2020
3,556
10,634
Other income
215
3,641
10,849
1,483
4,333
690
5,023
Income before income taxes
2,158
5,826
(11
Statement of Cash Flows: (1)
Cash provided by operating activities
3,262
Additional Cash Flow information:
Represents revenues, expenses, net income and cash flow information of 1899 Pennsylvania Avenue, which was sold on December 24, 2020.
12
4.
Investments in Unconsolidated Joint Ventures
The following tables summarize our investments in unconsolidated joint ventures as of the dates thereof and the income or loss from these investments for the periods set forth below.
Paramount
As of
Our Share of Investments:
Ownership
712 Fifth Avenue (1)
50.0%
Market Center
67.0%
186,301
192,306
55 Second Street (2)
44.1%
89,576
92,298
111 Sutter Street
49.0%
35,956
37,818
60 Wall Street (2)
5.0%
19,216
19,164
One Steuart Lane (2)
35.0% (3)
70,656
67,505
Oder-Center, Germany (2)
9.5%
3,686
3,633
Our Share of Net Income (Loss):
431
229
(10,697
458
(2,228
(2,654
(9,272
(8,578
(702
(713
(2,171
(2,059
(685
(884
(1,874
(2,413
18
52
(81
3,363
(4)
(223
3,138
(1,773
26
(33
14
At December 31, 2020, our basis in the joint venture that owns 712 Fifth Avenue was negative $22,345. Since we have no further obligation to fund additional capital to the joint venture, we no longer recognize our proportionate share of earnings from the joint venture. Instead, we recognize income only to the extent we receive cash distributions from the joint venture and recognize losses to the extent we make cash contributions to the joint venture. During the nine months ended September 30, 2021, we received $1,053 in distributions from the joint venture and made an $11,750 contribution to the joint venture. Accordingly, we recognized a loss of $10,697, which is included in “loss from unconsolidated joint ventures” on our consolidated statements of income for the nine months ended September 30, 2021. Additionally, the joint venture had net losses of $3,439 for the nine months ended September 30, 2021, of which our 50.0% share was $1,720. Accordingly, our basis in the joint venture, taking into account distributions received, contributions made and our share of losses, was negative $13,368 as of September 30, 2021.
(2)
As of September 30, 2021, the carrying amount of our investments in 55 Second Street, 60 Wall Street, One Steuart Lane and Oder-Center is greater than our share of equity in these investments by $480, $2,628, $970 and $4,797, respectively, and primarily represents the unamortized portion of our capitalized acquisition costs. Basis differences allocated to depreciable assets are being amortized into income or loss from the unconsolidated joint ventures to which they relate, over the estimated useful life of the related assets.
(3)
Represents our consolidated Residential Development Fund’s (“RDF”) economic interest in One Steuart Lane, a for-sale residential condominium development project.
Includes RDF’s share of gain on sale of residential condominium units.
The following tables provide the combined summarized financial information of our unconsolidated joint ventures as of the dates thereof and for the periods set forth below.
Balance Sheets:
2,254,141
2,674,858
Cash and cash equivalents and restricted cash
210,194
120,149
Intangible assets, net
71,193
110,307
For-sale residential condominium units (1)
389,755
62,099
45,761
Total assets
2,987,382
2,951,075
Notes and mortgages payable, net
1,846,667
1,801,084
Intangible liabilities, net
20,447
26,772
73,926
87,575
Total liabilities
1,941,040
1,915,431
1,046,342
1,035,644
Income Statements:
57,998
61,340
171,721
182,923
92,360
625
93,698
2,149
150,358
61,965
265,419
185,072
102,949
26,381
153,526
81,963
26,432
29,700
80,899
88,981
129,381
56,081
234,425
170,944
Interest and other (loss) income
(27
(45
(83
(17,503
(14,030
(45,135
(44,244
Net income (loss) before income taxes
3,447
(8,191
(14,224
(30,113
(17
(1
(32
3,430
(8,192
(14,256
(30,158
Represents the cost of residential condominium units at One Steuart Lane that are available for sale.
Includes proceeds and cost of sales from the sale of residential condominium units at One Steuart Lane.
5.
Investments in Unconsolidated Real Estate Funds
We are the general partner and investment manager of Paramount Group Real Estate Fund VIII, LP (“Fund VIII”) and Paramount Group Real Estate Fund X, LP and its parallel fund, Paramount Group Real Estate Fund X-ECI, LP, (collectively, “Fund X”), our Alternative Investment Funds, which invest in mortgage and mezzanine loans and preferred equity investments. While Fund VIII’s investment period has ended, Fund X’s investment period ends in December 2025. As of September 30, 2021, Fund X has $192,000,000 of capital committed, of which $78,968,000 has been invested and $34,424,000 has been reserved for future funding. Our ownership interest in Fund VIII and Fund X was approximately 1.3% and 7.8%, respectively, as of September 30, 2021.
As of September 30, 2021 and December 31, 2020, our share of the investments in the above mentioned unconsolidated real estate funds aggregated $12,225,000 and $12,917,000, respectively. We recognized income of $276,000 and loss of $56,000 for the three months ended September 30, 2021 and 2020, respectively, and income of $604,000 and $85,000 for the nine months ended September 30, 2021 and 2020, respectively.
6.
Intangible Assets and Liabilities
The following tables summarize our intangible assets (acquired above-market leases and acquired in-place leases) and intangible liabilities (acquired below-market leases) and the related amortization as of the dates thereof and for the periods set forth below.
Intangible assets:
Gross amount
377,109
436,851
Accumulated amortization
(249,580
(283,332
Intangible liabilities:
156,104
163,977
(108,249
(107,981
(component of "rental revenue")
722
1,910
2,335
4,688
Amortization of acquired in-place leases
(component of "depreciation and amortization")
6,413
9,195
20,183
27,877
The following table sets forth annual amortization of acquired above and below-market leases, net and amortization of acquired in-place leases for each of the five succeeding years commencing from January 1, 2022.
For the Year Ending December 31,
Above and
Below-Market
Leases, Net
In-Place Leases
2022
1,345
21,644
2023
5,080
17,705
2024
6,020
14,248
2025
4,674
10,451
2026
2,801
7,896
15
7.
Debt
On July 29, 2021, we completed an $860,000,000 refinancing of 1301 Avenue of the Americas, a 1.7 million square foot trophy office building, located in New York, New York. The new five-year interest-only loan has a weighted average interest rate of 2.95% and is comprised of a $500,000,000 fixed rate tranche and a $360,000,000 variable rate tranche. The proceeds from the refinancing were used to repay the existing $850,000,000 loan that was scheduled to mature in November 2021.
The following table summarizes our consolidated outstanding debt.
Interest Rate
Maturity
Fixed/
as of
Date
Variable Rate
Notes and mortgages payable:
1633 Broadway (1)
Dec-2029
Fixed
2.99
%
1,250,000
One Market Plaza (1)
Feb-2024
4.03
975,000
1301 Avenue of the Americas
Aug-2026
Fixed (2)
2.46
500,000
L + 356 bps (3)
3.65
360,000
350,000
2.95
860,000
850,000
31 West 52nd Street
June-2026
3.80
300 Mission Street (1)
Oct-2023
273,000
244,434
Total notes and mortgages payable
3.40
3,858,000
3,819,434
Less: unamortized deferred financing costs
(23,555
(18,695
Total notes and mortgages payable, net
$1.0 Billion Revolving Credit
Facility
Jan-2022 (4)
L + 115 bps
n/a
Our ownership interests in 1633 Broadway, One Market Plaza and 300 Mission Street are 90.0%, 49.0% and 31.1%, respectively.
Represents variable rate loans that have been fixed by interest rate swaps through August 2024. See Note 8, Derivative Instruments and Hedging Activities.
Represents variable rate loans, where LIBOR has been capped at 2.00% through August 2023. See Note 8, Derivative Instruments and Hedging Activities.
The $1.0 billion revolving credit facility matures on January 10, 2022 and has two six-month extension options.
16
8.
Derivative Instruments and Hedging Activities
We record all derivatives on our consolidated balance sheets at fair value in accordance with Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and whether we have designated a derivative as a hedge and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. We use derivative financial instruments in the normal course of business to selectively manage or hedge a portion of the risk associated with our indebtedness and interest payments. Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish these objectives, we primarily use interest rate swaps and interest rate caps. Interest rate swaps and interest rate caps that are designated as hedges are so designated at the inception of the contract. We require that hedging derivative instruments be highly effective in reducing the risk exposure that they are designated to hedge. The changes in the fair value of interest rate swaps and interest rate caps that are designated as hedges are recognized in “other comprehensive loss” (outside of earnings) and subsequently reclassified to earnings over the term that the hedged transaction affects earnings.
On July 29, 2021, we completed an $860,000,000 refinancing of 1301 Avenue of the Americas. In connection with the refinancing, we entered into interest rate swap agreements on the loan with an aggregate notional amount of $500,000,000 to fix LIBOR at 0.46% through August 2024. We also entered into interest rate cap agreements with an aggregate notional amount of $360,000,000 to cap LIBOR at 2.00% through August 2023. These interest rate swaps and interest rate caps are designated as cash flow hedges and therefore changes in their fair values are recognized in other comprehensive income or loss (outside of earnings). We recognized other comprehensive income of $995,000 for the three and nine months ended September 30, 2021, from the changes in fair value of these derivative financial instruments. See Note 10, Accumulated Other Comprehensive Loss. During the next twelve months, we estimate that $1,687,000 of the amounts to be recognized in accumulated other comprehensive loss will be reclassified as an increase to interest expense.
The table below provide additional details on our interest rate swaps that are designated as cash flow hedges.
Notional
Strike
Fair Value as of
Property
Effective Date
Maturity Date
Rate
Jul-2021
Aug-2024
0.46
1,053
Total interest rate swap assets designated as cash flow hedges (included in "other assets")
We have agreements with various derivative counterparties that contain provisions wherein a default on our indebtedness could be deemed a default on our derivative obligations, which would require us to settle our derivative obligations for cash. As of September 30, 2021, we did not have any obligations relating to our interest rate swaps or interest rate caps that contained such provisions.
9.
Stock Repurchase Program
On November 5, 2019, we received authorization from our Board of Directors to repurchase up to $200,000,000 of our common stock, from time to time, in the open market or in privately negotiated transactions. During 2020, we repurchased 13,813,158 common shares at a weighted average price of $8.69 per share, or $120,000,000 in the aggregate, of which 12,090,055 shares were repurchased in the nine months ended September 30, 2020 at a weighted average price of $8.98 per share, or $108,520,000 in the aggregate. We did not repurchase any shares in the nine months ended September 30, 2021. We have $80,000,000 available for future repurchases under the existing program. The amount and timing of future repurchases, if any, will depend on a number of factors, including, the price and availability of our shares, trading volume, general market conditions and available funding. The stock repurchase program may be suspended or discontinued at any time.
17
10.
Accumulated Other Comprehensive Loss
The following table sets forth changes in accumulated other comprehensive loss by component for the three and nine months ended September 30, 2021 and 2020, including amounts attributable to noncontrolling interests in the Operating Partnership.
Amount of income related to the cash flow hedges recognized
in other comprehensive loss (1)
671
Amounts reclassified from accumulated other comprehensive
loss increasing interest and debt expense (1)
324
Amount of (loss) income related to unconsolidated joint ventures
recognized in other comprehensive loss (2)
(88
(62
2,693
(16,734
loss increasing loss from unconsolidated joint ventures (2)
1,016
966
2,984
1,281
Represents amounts related to interest rate swaps with an aggregate notional value of $500,000 and interest rate caps with an aggregate notional value of $360,000, which were designated as cash flow hedges.
Primarily represents amounts related to interest rate swap with a notional value of $402,000, which was designated as cash flow hedge.
11.
Noncontrolling Interests
Consolidated Joint Ventures
Noncontrolling interests in consolidated joint ventures consist of equity interests held by third parties in 1633 Broadway, One Market Plaza and 300 Mission Street. As of September 30, 2021 and December 31, 2020, noncontrolling interests in our consolidated joint ventures aggregated $435,142,000 and $437,161,000, respectively.
Consolidated Real Estate Fund
Noncontrolling interests in our consolidated real estate fund consists of equity interests held by third parties in our Residential Development Fund. As of September 30, 2021 and December 31, 2020, the noncontrolling interest in our consolidated real estate fund aggregated $82,209,000 and $79,017,000, respectively.
Noncontrolling interests in the Operating Partnership represent common units of the Operating Partnership that are held by third parties, including management, and units issued to management under equity incentive plans. Common units of the Operating Partnership may be tendered for redemption to the Operating Partnership for cash. We, at our option, may assume that obligation and pay the holder either cash or common shares on a one-for-one basis. Since the number of common shares outstanding is equal to the number of common units owned by us, the redemption value of each common unit is equal to the market value of each common share and distributions paid to each common unitholder is equivalent to dividends paid to common stockholders. As of September 30, 2021 and December 31, 2020, noncontrolling interests in the Operating Partnership on our consolidated balance sheets had a carrying amount of $357,185,000 and $346,379,000, respectively, and a redemption value of $195,973,000 and $187,640,000, respectively, based on the closing share price of our common stock on the New York Stock Exchange.
12.
Variable Interest Entities (“VIEs”)
In the normal course of business, we are the general partner of various types of investment vehicles, which may be considered VIEs. We may, from time to time, own equity or debt securities through vehicles, each of which are considered variable interests. Our involvement in financing the operations of the VIEs is generally limited to our investments in the entity. We consolidate these entities when we are deemed to be the primary beneficiary.
Consolidated VIEs
We are the sole general partner of, and owned approximately 90.9% of, the Operating Partnership as of September 30, 2021. The Operating Partnership is considered a VIE and is consolidated in our consolidated financial statements. Since we conduct our business through and substantially all of our interests are held by the Operating Partnership, the assets and liabilities on our consolidated financial statements represent the assets and liabilities of the Operating Partnership. As of September 30, 2021 and December 31, 2020, the Operating Partnership held interests in consolidated VIEs owning properties and a real estate fund that were determined to be VIEs. The assets of these consolidated VIEs may only be used to settle the obligations of the entities and such obligations are secured only by the assets of the entities and are non-recourse to the Operating Partnership or us. The following table summarizes the assets and liabilities of consolidated VIEs of the Operating Partnership.
3,437,064
3,470,766
206,019
134,647
3,887
6,871
202,051
192,401
Deferred charges, net
50,621
55,156
65,742
76,545
34,250
21,496
Total VIE assets
4,070,290
4,025,387
2,487,363
2,457,272
59,348
51,590
29,084
33,566
5,842
4,486
Total VIE liabilities
2,581,637
2,546,914
Unconsolidated VIEs
As of September 30, 2021, the Operating Partnership held variable interests in entities that own our unconsolidated real estate funds that were deemed to be VIEs. The following table summarizes our investments in these unconsolidated real estate funds and the maximum risk of loss from these investments.
Investments
Asset management fees and other receivables
23
561
Maximum risk of loss
12,248
13,478
19
13.
Fair Value Measurements
Financial Assets Measured at Fair Value
Interest rate swaps and interest rate caps are valued by a third-party specialist using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each swap and cap. This analysis reflects the contractual terms of the interest rate swaps and interest rate caps and uses observable market-based inputs, including interest rate curves and implied volatilities. Interest rate swaps and interest rate caps are classified as Level 2 in the fair value hierarchy.
The following table summarizes the fair value of our financial assets that are measured at fair value on our consolidated balance sheets as of the dates set forth below, based on their levels in the fair value hierarchy.
As of September 30, 2021
Level 1
Level 2
Level 3
Marketable securities (included in "other assets")
21,706
Interest rate swap assets (included in "other assets")
Interest rate cap assets (included in "other assets")
82
22,841
1,135
As of December 31, 2020
17,178
Financial Liabilities Not Measured at Fair Value
Financial liabilities not measured at fair value on our consolidated balance sheets consist of notes and mortgages payable, and the revolving credit facility. The following table summarizes the carrying amounts and fair value of these financial instruments as of the dates set forth below.
Carrying Amount
Fair Value
Notes and mortgages payable
3,902,911
3,871,644
20
14.
Leases
We lease office, retail and storage space to tenants, primarily under non-cancellable operating leases, which generally have terms ranging from five to fifteen years. Most of our leases provide tenants with extension options at either fixed or market rates and few of our leases provide tenants with options to early terminate, but such options generally impose an economic penalty on the tenant upon exercising. Rental revenue is recognized in accordance with ASC Topic 842, Leases, and includes (i) fixed payments of cash rents, which represents revenue each tenant pays in accordance with the terms of its respective lease and that is recognized on a straight-line basis over the non-cancellable term of the lease, and includes the effects of rent steps and rent abatements under the leases, (ii) variable payments of tenant reimbursements, which are recoveries of all or a portion of the operating expenses and real estate taxes of the property and is recognized in the same period as the expenses are incurred, (iii) amortization of acquired above and below-market leases, net and (iv) lease termination income.
The following table sets forth the details of our rental revenue.
Rental revenue:
158,400
153,065
478,670
467,609
Variable
12,451
12,355
39,955
37,225
Total rental revenue
Includes (i) $14,863 and $26,172 of non-cash write-offs, primarily for straight-line rent receivables in the three and nine months ended September 30, 2020, respectively, and (ii) $2,051 of reserves for uncollectible accounts receivable in the nine months ended September 30, 2020.
Includes $5,051 of income in connection with a tenant’s lease termination at 300 Mission Street.
The following table is a schedule of future undiscounted cash flows under non-cancellable operating leases in effect as of September 30, 2021, for the three-month period from October 1, 2021 through December 31, 2021, and each of the five succeeding years and thereafter commencing January 1, 2022.
161,526
634,446
620,383
596,696
541,026
445,087
Thereafter
2,168,408
5,167,572
21
15. Fee and Other Income
The following table sets forth the details of our fee and other income.
Fee income:
Asset management
3,280
3,636
10,175
10,728
Property management
2,176
2,270
6,457
6,959
Acquisition, disposition, leasing and other
1,105
3,247
2,800
4,005
Total fee income
6,561
9,153
19,432
21,692
Other income (1)
1,719
2,202
4,509
5,353
Total fee and other income
Primarily comprised of (i) tenant requested services, including overtime heating and cooling and (ii) parking income.
16.
Interest and Other Income, net
The following table sets forth the details of interest and other income, net.
Interest income, net
221
364
1,008
1,780
Mark-to-market of investments in our
deferred compensation plans (1)
740
1,502
580
Total interest and other income, net
The change resulting from the mark-to-market of the deferred compensation plan assets is entirely offset by the change in deferred compensation plan liabilities, which is included as a component of “general and administrative” expenses on our consolidated statements of income.
17.
Interest and Debt Expense
The following table sets forth the details of interest and debt expense.
Interest expense
33,600
33,472
98,613
101,463
2,666
2,320
Total interest and debt expense
36,266
35,792
105,919
108,420
Includes $761 of expense from the non-cash write-off of deferred financing costs in connection with the $860,000 refinancing of 1301 Avenue of the Americas in July 2021. See Note 7, Debt.
22
18.
Incentive Compensation
Stock-Based Compensation
Our Amended and Restated 2014 Equity Incentive Plan provides for grants of equity awards to our executive officers, non-employee directors and employees in order to attract and motivate talent for which we compete. In addition, equity awards are an effective management retention tool as they vest over multiple years based on continued employment. Equity awards are granted in the form of (i) restricted stock and (ii) long-term incentive plan (“LTIP”) units, which represent a class of partnership interests in our Operating Partnership and are typically comprised of performance-based LTIP units, time-based LTIP units and time-based appreciation only LTIP (“AOLTIP”) units. We account for all stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation. We recognized stock-based compensation expense of $4,192,000 and $4,503,000 for the three months ended September 30, 2021 and 2020, respectively, and $14,421,000 and $14,141,000 for the nine months ended September 30, 2021 and 2020, respectively, related to awards granted in prior periods, including the 2020 equity grants (“2020 Equity Grants”) described below.
2020 Equity Grants
2020 Performance-Based Awards Program (“2020 Performance Program”)
On January 11, 2021, the Compensation Committee of our Board of Directors (the “Compensation Committee”) approved the 2020 Performance Program, a multi-year performance-based long-term incentive compensation program. Under the 2020 Performance Program, participants may earn awards in the form of LTIP units based on our Total Shareholder Return (“TSR”) over a three-year performance measurement period beginning on January 1, 2021 and continuing through December 31, 2023. Specifically, 50.0% of the awards would be earned based on the rank of our TSR relative to the TSR of our Central Business District focused New York City office peers, comprised of Vornado Realty Trust, SL Green Realty Corp., Empire State Realty Trust and Columbia Property Trust, and the remaining 50.0% of the awards would be earned based on the percentile rank of our TSR relative to the performance of the constituents of the SNL U.S. Office REIT Index at the time the awards were granted. Furthermore, if our TSR is negative over the three-year performance measurement period, then the number of LTIP units that are earned under the 2020 Performance Program will be reduced by 30.0% of the number of such awards that otherwise would have been earned. Additionally, if the designated performance objectives are achieved, awards earned under the 2020 Performance Program are subject to vesting based on continued employment with us through December 31, 2024, with 50.0% of each award vesting upon the conclusion of the performance measurement period, and the remaining 50.0% vesting on December 31, 2024. Lastly, our Named Executive Officers are required to hold earned awards for an additional year following vesting. The fair value of the awards granted under the 2020 Performance Program on the date of the grant was $7,303,000 and is being amortized into expense over the four-year vesting period using a graded vesting attribution method.
Time-Based Unit Awards Program (“LTIP and AOLTIP Units”)
On January 11, 2021, we granted an aggregate of 579,520 LTIP units and 2,171,875 AOLTIP units to our executive officers and employees that will vest over a period of three to four years. LTIP units are similar to common units of our Operating Partnership in that they are redeemable for cash, or at our election, may be converted on a one-for-one basis into shares of our common stock. AOLTIP units are similar to stock options in that it permits the holder to realize the benefit of any increase in the per share value of our common stock above the value at the time the AOLTIP units were granted and can be converted into a number of common units of our Operating Partnership that have an aggregate value equal to such increase. The common units issued upon the conversion of AOLTIP units are redeemable for cash, or at our election, may be converted on a one-for-one basis into shares of our common stock. The fair value of LTIP units and AOLTIP units on the date of grant were $4,598,000 and $4,344,000, respectively, and these awards are being amortized into expense on a straight-line basis over the vesting period.
Restricted Stock
On January 11, 2021, we granted an aggregate of 166,686 shares of restricted stock to our employees that will vest over a period of four years. The fair value of the shares of restricted stock on the date of grant was $1,439,000, which is being amortized into expense on a straight-line basis over the vesting period.
Completion of the 2017 Performance-Based Awards Program (“2017 Performance Program”)
On January 11, 2021, the Compensation Committee determined that the performance goals set forth in the 2017 Performance Program were not satisfied during the performance measurement period, which ended on December 31, 2020. Accordingly, all of the 1,382,807 LTIP units that were granted on February 5, 2018, were forfeited, with no awards being earned. These awards had a grant date fair value of $7,009,000 and a remaining unrecognized compensation cost of $208,000 as of September 30, 2021, which will be amortized over a weighted-average period of 0.25 years.
19.
Earnings Per Share
The following table summarizes our net loss and the number of common shares used in the computation of basic and diluted loss per common share, which includes the weighted average number of common shares outstanding and the effect of dilutive potential common shares, if any.
(Amounts in thousands, except per share amounts)
Numerator:
Continuing Operations:
Net loss from continuing operations attributable to
common stockholders
(8,921
(15,187
Earnings allocated to unvested participating securities
(54
(40
Numerator for loss from continuing operations per
common share - basic and diluted
(2,072
(8,935
(21,630
(15,227
Discontinued Operations:
Net income from discontinued operations attributable to
1,963
5,307
(4
Numerator for income from discontinued operations
per common share - basic and diluted
1,959
5,293
Numerator for loss per common share - basic and diluted
(6,976
(9,934
Denominator:
Denominator for basic loss per common share - weighted
average shares
218,706
221,461
218,690
223,593
Effect of dilutive stock-based compensation plans (1)
Denominator for diluted loss per common share - weighted
(Loss) Income per Common Share - Basic and Diluted:
Continuing operations, net
Discontinued operations, net
Loss per common share - basic and diluted
The effect of dilutive securities excludes 23,862 and 22,941 weighted average share equivalents for the three months ended September 30, 2021 and 2020, respectively, and 23,785 and 23,795 weighted average share equivalents for the nine months ended September 30, 2021 and 2020, respectively, as their effect was anti-dilutive.
20.
Related Parties
Management Agreements
We provide property management, leasing and other related services to certain properties owned by members of the Otto Family. We recognized fee income of $270,000 and $260,000 for the three months ended September 30, 2021 and 2020, respectively, and $1,497,000 and $967,000 for the nine months ended September 30, 2021 and 2020, respectively, in connection with these agreements, which is included as a component of “fee and other income” on our consolidated statements of income. As of September 30, 2021 and December 31, 2020, amounts owed to us under these agreements aggregated $474,000 and $34,000, respectively, which are included as a component of “accounts and other receivables” on our consolidated balance sheets.
We also provide property management, asset management, leasing and other related services to our unconsolidated joint ventures and real estate funds. We recognized fee income of $5,737,000 and $6,841,000 for the three months ended September 30, 2021 and 2020, respectively, and $16,239,000 and $17,550,000 for the nine months ended September 30, 2021 and 2020, respectively, in connection with these agreements, which is included as a component of “fee and other income” on our consolidated statements of income. As of September 30, 2021 and December 31, 2020, amounts owed to us under these agreements aggregated $4,097,000 and $5,011,000, respectively, which are included as a component of “accounts and other receivables” on our consolidated balance sheets.
Hamburg Trust Consulting HTC GmbH (“HTC”)
We have an agreement with HTC, a licensed broker in Germany, to supervise selling efforts for our private equity real estate funds (or investments in feeder vehicles for these funds) to investors in Germany, including distribution of securitized notes of feeder vehicles for Fund X. Pursuant to this agreement, we have agreed to pay HTC for the costs incurred to sell investments in these funds or their feeder vehicles, including certain incremental costs incurred by HTC as a result of the engagement, plus a mark-up of 10%. HTC is 100% owned by Albert Behler, our Chairman, Chief Executive Officer and President. We incurred expenses of $127,000 and $124,000 for the three months ended September 30, 2021 and 2020, respectively, and $372,000 and $389,000 for the nine months ended September 30, 2021 and 2020, respectively, in connection with this agreement, which is included as a component of “transaction related costs” on our consolidated statements of income. As of September 30, 2021 and December 31, 2020, we owed $250,000 and $123,000, respectively, to HTC under this agreement, which are included as a component of “accounts payable and accrued expenses” on our consolidated balance sheets.
Mannheim Trust
A subsidiary of Mannheim Trust leases office space at 712 Fifth Avenue, our 50.0% owned unconsolidated joint venture, pursuant to a lease agreement which expires in April 2023. Dr. Martin Bussmann (a member of our Board of Directors) is also a trustee and a director of Mannheim Trust. We recognized $91,000 in each of the three months ended September 30, 2021 and 2020, and $272,000 in each of the nine months ended September 30, 2021 and 2020 for our share of rental income pursuant to this lease.
We have entered into an agreement with Kramer Design Services (“Kramer Design”) to, among other things, develop company-wide standard branding guidelines. Kramer Design is owned by the spouse of Albert Behler, our Chairman, Chief Executive Officer and President. We recognized expenses of $10,000 for the three and nine months ended September 30, 2021 and $47,000 and $187,000 for the three and nine months ended September 30, 2020, respectively. There were no amounts owed to Kramer Design under this agreement as of September 30, 2021 and December 31, 2020.
Kramer Design has also entered into agreements with 712 Fifth Avenue, our 50.0% owned unconsolidated joint venture, to, among other things, create and design marketing materials with respect to the vacant retail space at 712 Fifth Avenue. We recognized expenses of $29,000 for the nine months ended September 30, 2020 for our share of the fees incurred in connection with these agreements.
25
21.
Commitments and Contingencies
Insurance
We carry commercial general liability coverage on our properties, with limits of liability customary within the industry. Similarly, we are insured against the risk of direct and indirect physical damage to our properties including coverage for the perils such as floods, earthquakes and windstorms. Our policies also cover the loss of rental income during an estimated reconstruction period. Our policies reflect limits and deductibles customary in the industry and specific to the buildings and portfolio. We also obtain title insurance policies when acquiring new properties. We currently have coverage for losses incurred in connection with both domestic and foreign terrorist-related activities. While we do carry commercial general liability insurance, property insurance and terrorism insurance with respect to our properties, these policies include limits and terms we consider commercially reasonable. In addition, there are certain losses (including, but not limited to, losses arising from known environmental conditions or acts of war) that are not insured, in full or in part, because they are either uninsurable or the cost of insurance makes it, in our belief, economically impractical to maintain such coverage. Should an uninsured loss arise against us, we would be required to use our own funds to resolve the issue, including litigation costs. We believe the policy specifications and insured limits are adequate given the relative risk of loss, the cost of the coverage and industry practice and, in consultation with our insurance advisors, we believe the properties in our portfolio are adequately insured.
Other Commitments and Contingencies
We are a party to various claims and routine litigation arising in the ordinary course of business. Some of these claims or others to which we may be subject from time to time, including claims arising specifically from the formation transactions, in connection with our initial public offering, may result in defense costs, settlements, fines or judgments against us, some of which are not, or cannot be, covered by insurance. Payment of any such costs, settlements, fines or judgments that are not insured could have an adverse impact on our financial position and results of operations. Should any litigation arise in connection with the formation transactions, we would contest it vigorously. In addition, certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could adversely impact our results of operations and cash flow, expose us to increased risks that would be uninsured, and/or adversely impact our ability to attract officers and directors.
The terms of our mortgage debt and certain side letters in place include certain restrictions and covenants which may limit, among other things, certain investments, the incurrence of additional indebtedness and liens and the disposition or other transfer of assets and interests in the borrower and other credit parties, and require compliance with certain debt yield, debt service coverage and loan to value ratios. In addition, our revolving credit facility contains representations, warranties, covenants, other agreements and events of default customary for agreements of this type with comparable companies. As of September 30, 2021, we believe we are in compliance with all of our covenants.
Transfer Tax Assessments
During 2017, the New York City Department of Finance issued Notices of Determination (“Notices”) assessing additional transfer taxes (including interest and penalties) in connection with the transfer of interests in certain properties during our 2014 initial public offering. We believe, after consultation with legal counsel, that the likelihood of a loss is reasonably possible, and while it is not possible to predict the outcome of these Notices, we estimate the range of loss could be between $0 and $51,000,000. Since no amount in this range is a better estimate than any other amount within the range, we have not accrued any liability arising from potential losses relating to these Notices in our consolidated financial statements.
22.
Segments
Our reportable segments are separated by region, based on the two regions in which we conduct our business: New York and San Francisco. Our determination of segments is aligned with our method of internal reporting and the way our Chief Executive Officer, who is also our Chief Operating Decision Maker, makes key operating decisions, evaluates financial results and manages our business.
The following tables provide Net Operating Income (“NOI”) for each reportable segment for the periods set forth below.
For the Three Months Ended September 30, 2021
New York
San Francisco
Property-related revenues
172,570
109,842
63,527
(799
Property-related operating expenses
(67,131
(47,545
(18,646
(940
NOI from unconsolidated joint ventures
(including One Steuart Lane)
16,214
2,875
8,665
NOI attributable to One Steuart Lane
(4,587
NOI (1)
117,066
65,172
53,546
(1,652
For the Three Months Ended September 30, 2020
Other (2)
171,263
106,287
62,086
2,890
(69,349
(49,072
(17,825
(2,452
12,935
3,116
10,019
(200
114,849
60,331
54,280
238
For the Nine Months Ended September 30, 2021
523,134
329,870
195,673
(2,409
(197,821
(142,370
(52,651
(2,800
37,097
8,445
24,054
4,598
357,823
195,945
167,076
(5,198
For the Nine Months Ended September 30, 2020
521,036
338,543
173,580
8,913
(203,526
(145,314
(50,798
(7,414
36,703
8,740
29,566
(1,603
354,213
201,969
152,348
(104
NOI is used to measure the operating performance of our properties. NOI consists of rental revenue (which includes property rentals, tenant reimbursements and lease termination income) and certain other property-related revenue less operating expenses (which includes property-related expenses such as cleaning, security, repairs and maintenance, utilities, property administration and real estate taxes). We use NOI internally as a performance measure and believe it provides useful information to investors regarding our financial condition and results of operations because it reflects only those income and expense items that are incurred at the property level. Other real estate companies may use different methodologies for calculating NOI and, accordingly, our presentation of NOI may not be comparable to other real estate companies.
NOI for the three and nine months ended September 30, 2020 includes NOI from discontinued operations. See Note 3, Discontinued Operations.
27
The following table provides a reconciliation of NOI to net loss attributable to common stockholders for the periods set forth below.
NOI
Add (subtract) adjustments to arrive to net income:
Fee income
Depreciation and amortization expense
(57,522
(58,889
(175,752
(176,032
General and administrative expenses
(13,257
(16,805
(46,039
(46,955
NOI from unconsolidated joint ventures (including
One Steuart Lane)
(16,214
(12,935
(37,097
(36,703
4,587
Adjustments related to discontinued operations
(2,157
(6,515
Other, net
189
(137
101
(457
Less: net (income) loss attributable to noncontrolling interests in:
The following table provides the total assets for each of our reportable segments as of the dates set forth below.
Total Assets as of:
5,375,688
2,712,559
457,338
5,388,596
2,698,983
466,518
28
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements, including the related notes included therein.
Forward-Looking Statements
We make statements in this Quarterly Report on Form 10-Q that are considered “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are usually identified by the use of words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “seeks,” “should,” “will,” and variations of such words or similar expressions. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of complying with those safe harbor provisions. These forward-looking statements reflect our current views about our plans, intentions, expectations, strategies and prospects, which are based on the information currently available to us and on assumptions we have made. Although we believe that our plans, intentions, expectations, strategies and prospects as reflected in or suggested by those forward-looking statements are reasonable, we can give no assurance that the plans, intentions, expectations or strategies will be attained or achieved. Furthermore, actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors that are beyond our control including, without limitation:
•
the negative impact of the coronavirus 2019 (“COVID-19”) global pandemic on the U.S., regional and global economies and our tenants’ financial condition and results of operations;
unfavorable market and economic conditions in the United States, including New York City and San Francisco, and globally;
risks associated with our high concentrations of our properties in New York City and San Francisco;
risks associated with ownership of real estate;
decreased rental rates or increased vacancy rates;
the risk we may lose a major tenant;
trends in the office real estate industry including telecommuting, flexible work schedules, open workplaces and teleconferencing;
limited ability to dispose of assets because of the relative illiquidity of real estate investments;
intense competition in the real estate market that may limit our ability to acquire attractive investment opportunities and increase the costs of those opportunities;
insufficient amounts of insurance;
uncertainties and risks related to adverse weather conditions, natural disasters and climate change;
risks associated with actual or threatened terrorist attacks;
exposure to liability relating to environmental and health and safety matters;
high costs associated with compliance with the Americans with Disabilities Act;
failure of acquisitions to yield anticipated results;
risks associated with real estate activity through our joint ventures and private equity real estate funds;
general volatility of the capital and credit markets and the market price of our common stock;
exposure to litigation or other claims;
loss of key personnel;
risks associated with security breaches through cyber attacks or cyber intrusions and other significant disruptions of our information technology (“IT”) networks and related systems;
risks associated with our substantial indebtedness;
failure to refinance current or future indebtedness on favorable terms, or at all;
failure to meet the restrictive covenants and requirements in our existing debt agreements;
fluctuations in interest rates and increased costs to refinance or issue new debt;
risks associated with variable rate debt, derivatives or hedging activity;
risks associated with the market for our common stock;
regulatory changes, including changes to tax laws and regulations;
failure to qualify as a real estate investment trust (“REIT”);
compliance with REIT requirements, which may cause us to forgo otherwise attractive opportunities or liquidate certain of our investments; or
any of the other risks included in this Quarterly Report on Form 10-Q or in our Annual Report on Form 10-K for the year ended December 31, 2020, including those set forth in Item 1A entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020.
Accordingly, there is no assurance that our expectations will be realized. Except as otherwise required by the U.S. federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. A reader should review carefully our consolidated financial statements and the notes thereto, as well as Item 1A entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020.
Critical Accounting Policies
There are no material changes to our critical accounting policies disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.
Recently Issued Accounting Literature
A summary of our recently issued accounting literature and their potential impact on our consolidated financial statements, if any, are included in Note 2, Basis of Presentation and Significant Accounting Policies, to our consolidated financial statements in this Quarterly Report on Form 10-Q.
Business Overview
We are a fully-integrated REIT focused on owning, operating, managing, acquiring and redeveloping high-quality, Class A office properties in select central business district submarkets of New York City and San Francisco. We conduct our business through, and substantially all of our interests in properties and investments are held by, Paramount Group Operating Partnership LP, a Delaware limited partnership (the “Operating Partnership”). We are the sole general partner of, and owned approximately 90.9% of, the Operating Partnership as of September 30, 2021.
COVID-19 Update
Financings
31
Leasing Results - Three Months Ended September 30, 2021
In the three months ended September 30, 2021, we leased 374,385 square feet, of which our share was 314,673 that was leased at a weighted average initial rent of $74.47 per square foot. This leasing activity, partially offset by lease expirations in the three months, increased leased occupancy and same store leased occupancy (properties owned by us in a similar manner during both reporting periods) by 230 basis points to 90.3% at September 30, 2021 from 88.0% at June 30, 2021. Of the 374,385 square feet leased, 301,568 represented our share of second generation space (space that had been vacant for less than twelve months) for which we achieved rental rate increases of 0.4% on a cash basis and 5.8% on a GAAP basis. The weighted average lease term for leases signed during the three months was 10.2 years and weighted average tenant improvements and leasing commissions on these leases were $11.75 per square foot per annum, or 15.8% of initial rent.
In the three months ended September 30, 2021, we leased 328,041 square feet in our New York portfolio, of which our share was 295,369 square feet that was leased at a weighted average initial rent of $72.77 per square foot. This leasing activity, partially offset by lease expirations in the three months, increased leased occupancy and same store leased occupancy by 340 basis points to 89.9% at September 30, 2021 from 86.5% at June 30, 2021. Of the 328,041 square feet leased, 288,786 represented our share of second generation space (space that had been vacant for less than twelve months) for which we achieved rental rate increases of 0.9% on a cash basis and 5.8% on a GAAP basis. The weighted average lease term for leases signed during the three months was 10.6 years and weighted average tenant improvements and leasing commissions on these leases were $11.80 per square foot per annum, or 16.2% of initial rent.
In the three months ended September 30, 2021, we leased 46,344 square feet in our San Francisco portfolio, of which our share was 19,304 square feet that was leased at a weighted average initial rent of $100.50 per square foot. This leasing activity, offset by lease expirations in the three months, decreased leased occupancy and same store leased occupancy by 70 basis points to 91.4% at September 30, 2021 from 92.1% at June 30, 2021. Of the 46,344 square feet leased in the three months, 12,782 square feet represented our share of second generation space for which rental rates decreased by 6.3% on a cash basis and increased by 5.8% on a GAAP basis. The weighted average lease term for leases signed during the three months was 4.6 years and weighted average tenant improvements and leasing commissions on these leases were $9.94 per square foot per annum, or 9.9% of initial rent.
32
The following table presents additional details on the leases signed during the three months ended September 30, 2021. It is not intended to coincide with the commencement of rental revenue in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The leasing statistics, except for square feet leased, represent office space only.
Three Months Ended September 30, 2021
Total square feet leased
374,385
328,041
46,344
Pro rata share of total square feet leased:
314,673
295,369
19,304
Initial rent (1)
74.47
72.77
100.50
Weighted average lease term (in years)
10.2
10.6
4.6
Tenant improvements and leasing commissions:
Per square foot
120.34
125.24
45.38
Per square foot per annum
11.75
11.80
9.94
Percentage of initial rent
15.8
16.2
9.9
Rent concessions:
Average free rent period (in months)
11.0
11.5
3.5
Average free rent period per annum (in months)
1.1
0.8
Second generation space: (2)
Square feet
301,568
288,786
12,782
Cash basis:
73.77
72.15
110.45
Prior escalated rent (3)
73.47
71.50
117.85
Percentage increase (decrease)
0.4
0.9
(6.3
%)
GAAP basis:
Straight-line rent
71.02
69.24
111.21
Prior straight-line rent
67.16
65.48
105.07
Percentage increase
5.8
Represents the weighted average cash basis starting rent per square foot and does not include free rent or periodic step-ups in rent.
Represents space leased that has been vacant for less than twelve months.
Represents the weighted average cash basis rents (including reimbursements) per square foot at expiration.
The following table presents same store leased occupancy as of the dates set forth below.
Same Store Leased Occupancy (1)
90.3
89.9
91.4
As of June 30, 2021
88.0
86.5
92.1
Represents percentage of square feet that is leased, including signed leases not yet commenced, for properties that were owned by us in a similar manner during both the current and prior reporting periods.
33
Leasing Results – Nine Months Ended September 30, 2021
In the nine months ended September 30, 2021, we leased 809,948 square feet, including an aggregate of 190,526 square feet of theatre space that was leased at 1633 Broadway for a weighted average term of 19 years. This leasing activity, offset by lease expirations in the nine months, decreased leased occupancy and same store leased occupancy (properties owned by us in a similar manner during both reporting periods) by 490 basis points to 90.3% at September 30, 2021 from 95.2% at December 31, 2020. Excluding the theatre leases, 619,422 square feet was leased in the nine months, of which our share was 531,363 square feet that was leased at a weighted average initial rent of $73.17 per square foot. Of the 619,422 square feet leased, 475,896 square feet represented our share of second generation space (space that had been vacant for less than twelve months) for which rental rates decreased 0.6% on a cash basis and increased 0.9% on a GAAP basis. The weighted average lease term for leases signed during the nine months was 9.7 years and weighted average tenant improvements and leasing commissions on these leases were $11.24 per square foot per annum, or 15.4% of initial rent.
In the nine months ended September 30, 2021, we leased 708,646 square feet in our New York portfolio, including an aggregate of 190,526 square feet of theatre space that was leased at 1633 Broadway for a weighted average term of 19 years. This leasing activity, offset by the lease expirations in the nine months, decreased leased occupancy and same store leased occupancy by 520 basis points to 89.9% at September 30, 2021 from 95.1% at December 31, 2020. Excluding the theatre leases, 518,120 square feet was leased in the nine months, of which our share was 479,603 square feet that was leased at a weighted average initial rent of $71.68 per square foot. Of the 518,120 square feet leased in the nine months, 436,002 square feet represented our share of second generation space for which we achieved rental rate increases of 0.2% on a cash basis and 1.9% on a GAAP basis. The weighted average lease term for leases signed during the nine months was 10.2 years and weighted average tenant improvements and leasing commissions on these leases were $11.46 per square foot per annum, or 16.0% of initial rent.
In the nine months ended September 30, 2021, we leased 101,302 square feet in our San Francisco portfolio, of which our share was 51,760 square feet that was leased at a weighted average initial rent of $86.98 per square foot. This leasing activity, offset by lease expirations in the nine months, decreased leased occupancy and same store leased occupancy by 430 basis points to 91.4% at September 30, 2021 from 95.7% at December 31, 2020. Of the 101,302 square feet leased in the nine months, 39,894 square feet represented our share of second generation space for which rental rates decreased 7.1% on a cash basis and 7.0% on a GAAP basis. The weighted average lease term for leases signed during the nine months was 4.5 years and weighted average tenant improvements and leasing commissions on these leases were $6.50 per square foot per annum, or 7.5% of initial rent.
34
The following table presents additional details on the leases signed during the nine months ended September 30, 2021. It is not intended to coincide with the commencement of rental revenue in accordance with GAAP. The leasing statistics, except for square feet leased, represent office space only.
Nine Months Ended September 30, 2021
809,948
708,646
101,302
531,363
479,603
51,760
Initial rent (2)
73.17
71.68
86.98
9.7
4.5
108.74
117.35
28.96
11.24
11.46
6.50
15.4
16.0
7.5
11.3
12.2
3.2
1.2
0.7
Second generation space: (3)
475,896
436,002
39,894
74.01
72.65
88.86
Prior escalated rent (4)
74.44
72.50
95.70
Percentage (decrease) increase
(0.6
0.2
(7.1
71.05
69.25
90.68
70.44
67.96
97.55
1.9
(7.0
Includes an aggregate of 190,526 square feet of theatre space that was leased at 1633 Broadway for a weighted average term of 19 years that is excluded from our pro rata share of total square feet leased and the related statistics.
95.2
95.1
95.7
35
Financial Results - Three Months Ended September 30, 2021 and 2020
Net Income, FFO and Core FFO
Net loss attributable to common stockholders was $2,055,000, or $0.01 per diluted share, for the three months ended September 30, 2021, compared to $6,958,000, or $0.03 per diluted share, for the three months ended September 30, 2020. The current period net loss attributable to common stockholders of $2,055,000 was impacted by lower property rental revenue due to a reduction in weighted average portfolio occupancy levels (86.7% for the three months ended September 30, 2021 compared to 94.8% for the three months ended September 30, 2020). The prior period net loss attributable to common stockholders of $6,958,000 included non-cash write-offs of straight-line rent receivables aggregating $11,986,000.
Funds from Operations (“FFO”) attributable to common stockholders was $50,318,000, or $0.23 per diluted share, for the three months ended September 30, 2021, compared to $49,733,000, or $0.22 per diluted share, for the three months ended September 30, 2020. The current period FFO attributable to common stockholders of $50,318,000 was impacted by lower property rental revenue due to a reduction in weighted average portfolio occupancy levels (86.7% for the three months ended September 30, 2021 compared to 94.8% for the three months ended September 30, 2020). The prior period FFO attributable to common stockholders of $49,733,000 included non-cash write-offs of straight-line rent receivables aggregating $11,986,000. In addition, FFO attributable to common stockholders for the three months ended September 30, 2021 and 2020 includes the impact of non-core items, which are listed in the table on page 60. The aggregate of the non-core items, net of amounts attributable to noncontrolling interests, increased FFO attributable to common stockholders for the three months ended September 30, 2021 and 2020 by $249,000 and $173,000, respectively, or $0.00 per diluted share.
Core Funds from Operations (“Core FFO”) attributable to common stockholders, which excludes the impact of the non-core items listed on page 60, was $50,069,000, or $0.23 per diluted share, for the three months ended September 30, 2021, compared to $49,560,000, or $0.22 per diluted share, for the three months ended September 30, 2020.
Same Store Results
The table below summarizes the percentage (decrease) increase in our share of Same Store NOI and Same Store Cash NOI, by segment, for the three months ended September 30, 2021 versus September 30, 2020.
Same Store NOI
(9.8
(12.1
(5.1
Same Store Cash NOI
6.0
3.3
11.8
See pages 52-60 “Non-GAAP Financial Measures” for a reconciliation of these measures to the most directly comparable GAAP measure and the reasons why we believe these non-GAAP measures are useful.
36
Financial Results - Nine Months Ended September 30, 2021 and 2020
Net loss attributable to common stockholders was $21,576,000, or $0.10 per diluted share, for the nine months ended September 30, 2021, compared to $9,880,000, or $0.04 per diluted share, for the nine months ended September 30, 2020. The current period net loss attributable to common stockholders of $21,576,000 was impacted by (i) lower property rental revenue due to a reduction in weighted average portfolio occupancy levels (87.5% for the nine months ended September 30, 2021 compared to 94.3% for the nine months ended September 30, 2020) and (ii) a contribution to an unconsolidated joint venture of $10,688,000 that was expensed in accordance with GAAP. The prior period net loss attributable to common stockholders of $9,880,000 included non-cash write-offs (primarily for straight-line rent receivables) aggregating $19,016,000.
FFO attributable to common stockholders was $139,135,000, or $0.64 per diluted share, for the nine months ended September 30, 2021, compared to $161,982,000, or $0.72 per diluted share, for the nine months ended September 30, 2020. The current period FFO attributable to common stockholders of $139,135,000 was impacted by (i) lower property rental revenue due to a reduction in weighted average portfolio occupancy levels (87.5% for the nine months ended September 30, 2021 compared to 94.3% for the nine months ended September 30, 2020) and (ii) a contribution to an unconsolidated joint venture of $10,688,000 that was expensed in accordance with GAAP. The prior period FFO attributable to common stockholders of $161,982,000 included non-cash write-offs (primarily for straight-line rent receivables) aggregating $19,016,000. In addition, FFO attributable to common stockholders for the nine months ended September 30, 2021 and 2020 includes the impact of non-core items, which are listed in the table on page 60. The aggregate of the non-core items, net of amounts attributable to noncontrolling interests, decreased FFO attributable to common stockholders for the nine months ended September 30, 2021 by $9,114,000, or $0.04 per diluted share, and increased FFO attributable to common stockholders for the nine months ended September 30, 2020 by $795,000, or $0.00 per diluted share.
Core FFO attributable to common stockholders, which excludes the impact of the non-core items listed on page 60, was $148,249,000, or $0.68 per diluted share, for the nine months ended September 30, 2021, compared to $161,187,000, or $0.72 per diluted share, for the nine months ended September 30, 2020.
The table below summarizes the percentage (decrease) increase in our share of Same Store NOI and Same Store Cash NOI, by segment, for the nine months ended September 30, 2021 versus September 30, 2020.
(9.4
(12.0
(4.2
2.1
(0.2
6.9
See pages 55-60 “Non-GAAP Financial Measures” for a reconciliation of these measures to the most directly comparable GAAP measure and the reasons why we believe these non-GAAP measures are useful.
37
Results of Operations - Three Months Ended September 30, 2021 and 2020
The following pages summarize our consolidated results of operations for the three months ended September 30, 2021 and 2020.
For the Three Months Ended September 30,
Change
5,431
(3,075
2,356
(734
(1,367
(3,548
(5,643
4,491
332
(966
(474
11,382
(480
10,902
(2,147
8,755
(202
(3,202
(448
4,903
38
Revenues
Our revenues, which consist of rental revenue and fee and other income, were $179,131,000 for the three months ended September 30, 2021, compared to $176,775,000 for the three months ended September 30, 2020, an increase of $2,356,000. Below are the details of the increase (decrease) by segment.
Same store operations
(9,575
(9,858
283
Non-cash write-offs of straight-line rent receivables
14,863
13,454
1,409
143
119
Increase in rental revenue
3,606
1,811
(356
(94
(2,142
Decrease in fee income
(2,592
(483
(50
(371
Decrease in other income
Decrease in fee and other income
Total increase (decrease) in revenues
(2,640
Primarily due to a decrease in occupancy resulting from the expiration of Barclays’ lease at 1301 Avenue of the Americas and TD Bank’s lease at 31 West 52nd Street.
39
Expenses
Our expenses, which consist of operating, depreciation and amortization, general and administrative and transaction related costs, were $137,997,000 for the three months ended September 30, 2021, compared to $143,640,000 for the three months ended September 30, 2020, a decrease of $5,643,000. Below are the details of the (decrease) increase by segment.
(706
(1,527
821
(28
(Decrease) increase in operating
Operations
(2,727
1,547
(187
(Decrease) increase in depreciation
and amortization
Mark-to-market of investments
in our deferred compensation plan
(823
(2,725
Decrease in general and administrative
Increase in transaction related costs
Total (decrease) increase in expenses
(4,254
2,368
(3,757
Primarily due to lower amortization of in-place lease assets at 1301 Avenue of the Americas due to the expiration of such leases.
Represents the change in the mark-to-market of investments in our deferred compensation plan liabilities. This change is entirely offset by the change in plan assets which is included in “interest and other income, net”.
40
Income (Loss) from Unconsolidated Joint Ventures
Income from unconsolidated joint ventures was $223,000 for the three months ended September 30, 2021, compared to a loss of $4,268,000 in the three months ended September 30, 2020, an increase in income of $4,491,000. This increase resulted from:
One Steuart Lane
Total increase in income
Primarily due to our consolidated Residential Development Fund’s (“RDF”) share of gain on sale of residential condominium units at One Steuart Lane in the current year’s three months.
Income (Loss) from Unconsolidated Real Estate Funds
Income from unconsolidated real estate funds was $276,000 for the three months ended September 30, 2021, compared to a loss of $56,000 for the three months ended September 30, 2020, an increase in income of $332,000.
Interest and other income was $138,000 for the three months ended September 30, 2021, compared to $1,104,000 of income for the three months ended September 30, 2020, a decrease in income of $966,000. This decrease resulted from:
Decrease in the value of investments in our deferred compensation plan (which
is entirely offset by a decrease in "general and administrative")
Other, net (primarily lower yields on short-term investments)
(143
Total decrease in income
Interest and debt expense was $36,266,000 for the three months ended September 30, 2021, compared to $35,792,000 for the three months ended September 30, 2020, an increase of $474,000. This increase resulted primarily from a non‐cash write‐off of deferred financing costs in connection with the refinancing of 1301 Avenue of the Americas in the current year’s three months.
Income Tax Expense
Income tax expense was $873,000 for the three months ended September 30, 2021, compared to $393,000 for the three months ended September 30, 2020, an increase of $480,000. This increase resulted primarily from higher taxable income attributable to our taxable REIT subsidiaries.
Income from Discontinued Operations
Income from discontinued operations was $2,147,000 for the three months ended September 30, 2020 and represented income from 1899 Pennsylvania Avenue in Washington, D.C., which was sold in December 2020.
41
Net Income Attributable to Noncontrolling Interests in Consolidated Joint Ventures
Net income attributable to noncontrolling interests in consolidated joint ventures was $3,768,000 for the three months ended September 30, 2021, compared to $3,566,000 for the three months ended September 30, 2020, an increase in income allocated to noncontrolling interests of $202,000. This increase in income resulted from:
Higher income attributable to 1633 Broadway ($188 of income in 2021,
compared to loss of $962 in 2020)
1,150
(948
Total increase in income attributable to noncontrolling interests
202
Primarily due to the non-cash write-off of straight-line rent receivables in the prior year’s three months.
Net (Income) Loss Attributable to Noncontrolling Interests in Consolidated Real Estate Fund
Net income attributable to noncontrolling interests in consolidated real estate fund was $3,123,000 for the three months ended September 30, 2021, compared to net loss attributable to noncontrolling interests of $79,000 for the three months ended September 30, 2020, an increase in income allocated to noncontrolling interest of $3,202,000. This increase in income attributable to noncontrolling interests resulted primarily from RDF’s share of gain on sale of residential condominium units at One Steuart Lane in the current year’s three months.
Net Loss Attributable to Noncontrolling Interests in Operating Partnership
Net loss attributable to noncontrolling interests in the Operating Partnership was $204,000 for the three months ended September 30, 2021, compared to $652,000 for the three months ended September 30, 2020, a decrease in loss allocated to noncontrolling interests of $448,000. This decrease in loss resulted from lower net loss subject to allocation to the unitholders of the Operating Partnership for the three months ended September 30, 2021.
42
Results of Operations - Nine Months Ended September 30, 2021 and 2020
The following pages summarize our consolidated results of operations for the nine months ended September 30, 2021 and 2020.
13,791
(3,104
10,687
(1,371
(280
(916
(39
(2,606
(6,366
519
150
2,501
Loss from continuing operations, before income taxes
10,097
(1,313
8,784
(5,815
2,969
(11,439
(4,470
1,244
(11,696
43
Our revenues, which consist of rental revenue and fee and other income, were $542,566,000 for the nine months ended September 30, 2021, compared to $531,879,000 for the nine months ended September 30, 2020, an increase of $10,687,000. Below are the details of the increase (decrease) by segment.
(19,771
(28,406
8,635
Non-cash write-offs (primarily straight-line rent receivables)
26,172
18,854
7,318
Reserves for uncollectible accounts receivable
2,051
1,019
1,032
5,339
5,547
(274
Increase (decrease) in rental revenue
(8,467
22,532
(553
(502
(1,205
(2,260
(844
(205
(440
(199
(2,459
(8,672
22,092
(2,733
Primarily due to an increase in occupancy at 300 Mission Street.
Primarily due to income of $5,051 in the current year’s nine months, in connection with a tenant’s lease termination at 300 Mission Street.
44
Our expenses, which consist of operating, depreciation and amortization, general and administrative and transaction related costs, were $420,115,000 for the nine months ended September 30, 2021, compared to $422,721,000 for the nine months ended September 30, 2020, a decrease of $2,606,000. Below are the details of the (decrease) increase by segment.
(1,091
(2,944
1,853
(5,100
5,252
(432
922
(1,838
Decrease in transaction related costs
(8,044
7,105
(1,667
Primarily due to accelerated depreciation of tenant improvements in the current year’s nine months resulting from a tenant’s lease termination at 300 Mission Street and depreciation on tenant improvements placed into service in the current year’s nine months.
45
Loss from Unconsolidated Joint Ventures
Loss from unconsolidated joint ventures was $20,810,000 for the nine months ended September 30, 2021 compared to $14,444,000 in the nine months ended September 30, 2020, an increase of $6,366,000. This increase resulted from:
712 Fifth Avenue
(11,155
4,911
(122
Total increase in loss
Primarily due to an $11,750 contribution in the current year’s nine months to the joint venture that owns 712 Fifth Avenue that was expensed in accordance with GAAP. See Note 4, Investments in Unconsolidated Joint Ventures.
Primarily due to RDF’s share of gain on sale of residential condominium units at One Steuart Lane in the current year’s nine months.
Income from Unconsolidated Real Estate Funds
Income from unconsolidated real estate funds was $604,000 for the nine months ended September 30, 2021, compared to $85,000 for the nine months ended September 30, 2020, an increase of $519,000.
Interest and other income was $2,510,000 for the nine months ended September 30, 2021, compared to $2,360,000 for the nine months ended September 30, 2020, an increase in income of $150,000. This increase resulted from:
Increase in the value of investments in our deferred compensation plan (which
is entirely offset by an increase in "general and administrative")
(772
Interest and debt expense was $105,919,000 for the nine months ended September 30, 2021, compared to $108,420,000 for the nine months ended September 30, 2020, a decrease of $2,501,000. This decrease resulted primarily from (i) lower average LIBOR rates on variable rate debt in the current year’s nine months compared to prior year’s nine months and (ii) lower borrowings from our revolving credit facility in the current year’s nine months, partially offset by (iii) a non‐cash write‐off of deferred financing costs in connection with the refinancing of 1301 Avenue of the Americas in the current year’s nine months.
Income tax expense was $2,448,000 for the nine months ended September 30, 2021, compared to $1,135,000 for the nine months ended September 30, 2020, an increase of $1,313,000. This increase resulted primarily from higher taxable income attributable to our taxable REIT subsidiaries in the current year’s nine months.
Income from discontinued operations was $5,815,000 for the nine months ended September 30, 2020 and represented income from 1899 Pennsylvania Avenue in Washington, D.C., which was sold in December 2020.
46
Net income attributable to noncontrolling interests in consolidated joint ventures was $16,924,000 for the nine months ended September 30, 2021, compared to $5,485,000 for the nine months ended September 30, 2020, an increase in income allocated to noncontrolling interests of $11,439,000. This increase in income resulted from:
Higher income attributable to 300 Mission Street ($7,411 of income in 2021,
compared to loss of $2,243 in 2020)
9,654
Higher income attributable to 1633 Broadway ($547 of income in 2021,
compared to loss of $1,454 in 2020)
2,001
(216
11,439
Primarily due to an increase in occupancy and lease termination income in the current year’s nine months and non-cash write-off of straight-line rent receivables in the prior year’s nine months.
Primarily due to the non-cash write-off of straight-line rent receivables in the prior year’s nine months.
Net Income (Loss) Attributable to Noncontrolling Interests in Consolidated Real Estate Fund
Net income attributable to noncontrolling interests in consolidated real estate fund was $3,179,000 for the nine months ended September 30, 2021, compared to net loss attributable to noncontrolling interest in consolidated real estate fund of $1,291,000 for the nine months ended September 30, 2020, an increase in income allocated to noncontrolling interest of $4,470,000. This increase in income attributable to noncontrolling interests resulted primarily from RDF’s share of gain on sale of residential condominium units at One Steuart Lane in the current year’s nine months.
Net loss attributable to noncontrolling interests in the Operating Partnership was $2,139,000 for the nine months ended September 30, 2021, compared to $895,000 for the nine months ended September 30, 2020, an increase in loss attributable to noncontrolling interests of $1,244,000. This increase in loss resulted from higher net loss subject to allocation to the unitholders of the Operating Partnership for the nine months ended September 30, 2021.
47
Liquidity and Capital Resources
Liquidity
Our primary sources of liquidity include existing cash balances, cash flow from operations and borrowings available under our revolving credit facility. We expect that these sources will provide adequate liquidity over the next 12 months for all anticipated needs, including scheduled principal and interest payments on our outstanding indebtedness, existing and anticipated capital improvements, the cost of securing new and renewal leases, dividends to stockholders and distributions to unitholders, and all other capital needs related to the operations of our business. We anticipate that our long-term needs including debt maturities and the acquisition of additional properties will be funded by operating cash flow, mortgage financings and/or re-financings, the issuance of long-term debt or equity and cash on hand.
Although we may be able to anticipate and plan for certain of our liquidity needs, unexpected increases in uses of cash that are beyond our control and which affect our financial condition and results of operations may arise, or our sources of liquidity may be fewer than, and the funds available from such sources may be less than, anticipated or required.
As of September 30, 2021, we had $1.52 billion of liquidity comprised of $494,569,000 of cash and cash equivalents, $27,977,000 of restricted cash and $1.0 billion of borrowing capacity under our revolving credit facility. As of September 30, 2021, our outstanding consolidated debt aggregated $3.86 billion. We had no amounts outstanding under our revolving credit facility and none of our debt matures until October 2023. We may refinance our maturing debt when it comes due or repay it early depending on prevailing market conditions, liquidity requirements and other factors. The amounts involved in connection with these transactions could be material to our consolidated financial statements.
Revolving Credit Facility
Our $1.0 billion revolving credit facility matures in January 2022 and has two six-month extension options. The interest rate on the facility, at current leverage levels, is LIBOR plus 115 basis points and has a 20 basis points facility fee. We also have an option, subject to customary conditions and incremental lender commitments, to increase the capacity under the facility to $1.5 billion at any time prior to the maturity date of the facility. The facility contains certain restrictions and covenants that require us to maintain, on an ongoing basis, (i) a leverage ratio not to exceed 60%, however, the leverage ratio may be increased to 65% for any fiscal quarter in which an acquisition of real estate is completed and for up to the next three subsequent consecutive fiscal quarters, (ii) a secured leverage ratio not to exceed 50%, (iii) a fixed charge coverage ratio of at least 1.50, (iv) an unsecured leverage ratio not to exceed 60%, however, the unsecured leverage ratio may be increased to 65% for any fiscal quarter in which an acquisition of real estate is completed and for up to the next three subsequent consecutive fiscal quarters and (v) an unencumbered interest coverage ratio of at least 1.75. The facility also contains customary representations and warranties, limitations on permitted investments and other covenants.
Dividend Policy
On September 15, 2021, we declared a regular quarterly cash dividend of $0.07 per share of common stock for the third quarter ended September 30, 2021, which was paid on October 15, 2021 to stockholders of record as of the close of business on September 30, 2021. This dividend policy, if continued, would require us to pay out approximately $16,900,000 each quarter to common stockholders and unitholders.
48
Off Balance Sheet Arrangements
As of September 30, 2021, our unconsolidated joint ventures had $1.64 billion of outstanding indebtedness, of which our share was $612,078,000. We do not guarantee the indebtedness of our unconsolidated joint ventures other than providing customary environmental indemnities and guarantees of non-recourse carve-outs; however, we may elect to fund additional capital to a joint venture through equity contributions (generally on a basis proportionate to our ownership interests), advances or partner loans in order to enable the joint venture to repay this indebtedness upon maturity.
On November 5, 2019, we received authorization from our Board of Directors to repurchase up to $200,000,000 of our common stock, from time to time, in the open market or in privately negotiated transactions. During 2020, we repurchased 13,813,158 common shares at a weighted average price of $8.69 per share, or $120,000,000 in the aggregate, of which 12,090,055 shares were repurchased in the nine months ended September 30, 2020 at a weighted average price of $8.96 per share, or $108,520,000 in the aggregate. We did not repurchase any shares in the nine months ended September 30, 2021. We have $80,000,000 available for future repurchases under the existing program. The amount and timing of future repurchases, if any, will depend on a number of factors, including, the price and availability of our shares, trading volume, general market conditions and available funding. The stock repurchase program may be suspended or discontinued at any time.
49
During 2017, the New York City Department of Finance issued Notices of Determination (“Notices”) assessing additional transfer taxes (including interest and penalties) in connection with the transfer of interests in certain properties during our 2014 initial public offering. We believe, after consultation with legal counsel that the likelihood of a loss is reasonably possible, and while it is not possible to predict the outcome of these Notices, we estimate the range of loss could be between $0 and $51,000,000. Since no amount in this range is a better estimate than any other amount within the range, we have not accrued any liability arising from potential losses relating to these Notices in our consolidated financial statements.
Inflation
Substantially all of our leases provide for separate real estate tax and operating expense escalations. In addition, many of the leases provide for fixed base rent increases. We believe inflationary increases in expenses may be at least partially offset by the contractual rent increases and expense escalations described above. We do not believe inflation has had a material impact on our historical financial position or results of operations.
Cash Flows
Cash and cash equivalents and restricted cash were $522,546,000 and $465,324,000 as of September 30, 2021 and December 31, 2020, respectively, and $546,907,000 and $331,487,000 as of September 30, 2020 and December 31, 2019, respectively. Cash and cash equivalents and restricted cash increased by $57,222,000 and $215,420,000 for the nine months ended September 30, 2021 and 2020, respectively. The following table sets forth the changes in cash flow.
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Operating Activities
Nine months ended September 30, 2021 – We generated $188,060,000 of cash from operating activities for the nine months ended September 30, 2021, primarily from (i) $204,872,000 of net income (before $208,484,000 of non-cash adjustments) and (ii) $4,485,000 of distributions from unconsolidated joint ventures and real estate funds, partially offset by (iii) $21,297,000 of net changes in operating assets and liabilities. Non-cash adjustments of $208,484,000 were primarily comprised of depreciation and amortization, straight-lining of rental revenue, amortization of above and below-market leases and amortization of stock-based compensation.
Nine months ended September 30, 2020 – We generated $139,569,000 of cash from operating activities for the nine months ended September 30, 2020, primarily from (i) $176,877,000 of net income (before $183,458,000 of noncash adjustments), and (ii) $2,168,000 of distributions from unconsolidated joint ventures and real estate funds, partially offset by (iii) $39,476,000 of net changes in operating assets and liabilities. Noncash adjustments of $183,458,000 were primarily comprised of depreciation and amortization, straight-lining of rental revenue, amortization of above and below-market leases and amortization of stock-based compensation.
50
Investing Activities
Nine months ended September 30, 2021 – We used $88,380,000 of cash for investing activities for the nine months ended September 30, 2021, primarily for (i) $74,134,000 for additions to real estate, which were comprised of spending for tenant improvements and other building improvements, (ii) $11,750,000 of contributions to an unconsolidated joint venture and (iii) $3,257,000 of net purchases of marketable securities (which are held in our deferred compensation plan), partially offset by (iv) $761,000 of distributions of capital from unconsolidated real estate funds, net of contributions received.
Nine months ended September 30, 2020 – We used $19,533,000 of cash for investing activities for the nine months ended September 30, 2020, primarily for (i) $60,348,000 for additions to real estate, which were comprised of spending for tenant improvements and other building improvements, and (ii) $2,945,000 of contributions to our unconsolidated real estate funds, partially offset by (iii) $36,918,000 repayment of amounts due from affiliates, and (iv) $6,842,000 from the net sales of marketable securities (which are held in our deferred compensation plan).
Financing Activities
Nine months ended September 30, 2021 – We used $42,458,000 of cash for financing activities for the nine months ended September 30, 2021, primarily for (i) $850,000,000 for the repayment of notes and mortgages payable in connection with the refinancing of 1301 Avenue of the Americas, (ii) $50,582,000 for dividends and distributions to common stockholders and unitholders, (iii) $19,616,000 for distributions to noncontrolling interests, (iv) $10,593,000 for the payment of debt issuance costs in connection with the refinancing of 1301 Avenue of the Americas, (v) $214,000 for the repurchase of shares related to stock compensation agreements and related tax withholdings, and (vi) $140,000 for the purchase of interest rate caps, partially offset by (vii) $888,566,000 of proceeds from notes and mortgages payable (including $860,000,000 from the refinancing of 1301 Avenue of the Americas) and (viii) $121,000 of contributions from noncontrolling interests.
Nine months ended September 30, 2020 – We generated $95,384,000 of cash from financing activities for the nine months ended September 30, 2020, primarily from (i) $163,082,000 of borrowings under the revolving credit facility, (ii) $111,984,000 of proceeds from the sale of a 10.0% interest in 1633 Broadway, (iii) $11,555,000 of contributions from noncontrolling interests, and (iv) $9,791,000 of proceeds from notes and mortgages payable, partially offset by (v) $108,520,000 for the repurchases of common shares, (vi) $73,889,000 for dividends and distributions paid to common stockholders and unitholders, (vii) $9,530,000 for distributions to noncontrolling interests, (viii) $8,771,000 for repayment of note payable issued in connection with the acquisition of noncontrolling interest in consolidated real estate fund and (ix) $318,000 for the repurchase of shares related to stock compensation agreements and related tax withholdings.
Non-GAAP Financial Measures
We use and present NOI, Same Store NOI, FFO and Core FFO, as supplemental measures of our performance. The summary below describes our use of these measures, provides information regarding why we believe these measures are meaningful supplemental measures of our performance and reconciles these measures from net income or loss, the most directly comparable GAAP measure. Other real estate companies may use different methodologies for calculating these measures, and accordingly, our presentation of these measures may not be comparable to other real estate companies. These non-GAAP measures should not be considered a substitute for, and should only be considered together with and as a supplement to, financial information presented in accordance with GAAP.
Net Operating Income (“NOI”)
We use NOI to measure the operating performance of our properties. NOI consists of rental revenue (which includes property rentals, tenant reimbursements and lease termination income) and certain other property-related revenue less operating expenses (which includes property-related expenses such as cleaning, security, repairs and maintenance, utilities, property administration and real estate taxes). We also present Cash NOI, which deducts from NOI, straight-line rent adjustments and the amortization of above and below-market leases, including our share of such adjustments of unconsolidated joint ventures. In addition, we present Paramount's share of NOI and Cash NOI which represents our share of NOI and Cash NOI of consolidated and unconsolidated joint ventures, based on our percentage ownership in the underlying assets. We use NOI and Cash NOI internally as performance measures and believe they provide useful information to investors regarding our financial condition and results of operations because they reflect only those income and expense items that are incurred at property level. The following tables present reconciliations of net income or loss to NOI and Cash NOI for the three and nine months ended September 30, 2021 and 2020.
Reconciliation of net income (loss) to NOI and Cash NOI:
3,063
9,204
(7,635
Add (subtract) adjustments to arrive at NOI and Cash NOI:
37,215
19,334
973
22,458
12,760
1,048
873
865
(Income) loss from unconsolidated joint ventures
(449
3,615
(3,389
(6,561
Interest and other (income) loss, net
(138
(108
(189
Less NOI attributable to noncontrolling interests in:
(21,809
(2,573
(19,236
Paramount's share of NOI
95,257
62,599
34,310
Less:
Straight-line rent adjustments (including our share
of unconsolidated joint ventures)
1,260
1,848
(558
(30
(including our share of unconsolidated joint ventures)
(1,622
406
(2,028
Cash NOI
116,704
67,426
50,960
(1,682
Less Cash NOI attributable to noncontrolling interests in:
(21,174
(2,635
(18,539
Paramount's share of Cash NOI
95,530
64,791
32,421
Reconciliation of net (loss) income to NOI and Cash NOI:
(4,076
9,765
(9,812
39,942
17,787
1,160
21,585
12,492
1,715
393
383
Loss (income) from unconsolidated joint ventures
4,268
(239
4,251
256
(9,153
(1,104
(41
(1,063
137
(20,433
(1,443
(18,979
205
94,621
58,888
35,301
432
(5,523
4,134
(9,628
(29
(2,986
(3,065
128
106,468
64,544
41,587
337
(14,513
(1,768
(12,734
92,160
62,776
28,853
531
(3,021
34,089
(34,680
114,788
58,046
2,918
65,056
37,653
3,210
2,448
2,431
10,645
13,317
(3,152
(19,432
(2,510
(2,442
(101
(70,767
(7,685
(63,082
206
287,262
188,260
103,994
(4,992
(9,800
211
(10,041
(5,087
1,044
(6,131
342,936
197,200
150,904
(5,168
(64,313
(7,599
(56,714
278,829
189,601
94,190
(4,962
54
7,594
19,839
(34,014
119,888
52,794
3,350
66,121
37,377
4,922
1,132
(377
13,050
1,771
(21,692
(2,360
(278
(2,082
700
457
(51,857
(1,873
(49,973
1,645
304,001
200,096
102,375
1,530
(27,364
(19,344
(7,519
855
(8,374
361
319,691
194,780
124,630
281
(41,431
(2,272
(39,148
279,905
192,508
85,482
1,915
55
The tables below set forth the reconciliations of our share of NOI to our share of Same Store NOI and Same Store Cash NOI for the three and nine months ended September 30, 2021 and 2020. These metrics are used to measure the operating performance of our properties that were owned by us in a similar manner during both the current and prior reporting periods, and represents our share of Same Store NOI and Same Store Cash NOI from consolidated and unconsolidated joint ventures based on our percentage ownership in the underlying assets. Same Store NOI also excludes lease termination income, impairment of receivables arising from operating leases and certain other items that vary from period to period. Same Store Cash NOI excludes the effect of non-cash items such as the straight-line rent adjustments and the amortization of above and below-market leases.
Paramount's share of NOI for the three months ended
September 30, 2021 (1)
Dispositions / Discontinued Operations
1,609
1,652
Paramount's share of Same Store NOI for the three
months ended September 30, 2021
96,866
62,566
34,300
September 30, 2020 (1)
13,109
12,396
713
1,772
148
1,725
months ended September 30, 2020
107,345
71,183
36,162
Decrease in Same Store NOI
(10,479
(8,617
(1,862
% Decrease
See page 52 “Non-GAAP Financial Measures – NOI” for a reconciliation to net income or loss in accordance with GAAP and the reasons why we believe these non-GAAP measures are useful.
Represents NOI from discontinued operations (1899 Pennsylvania Avenue in Washington, D.C.).
56
Paramount's share of Cash NOI for the three months
ended September 30, 2021 (1)
1,639
1,682
Paramount's share of Same Store Cash NOI for the
three months ended September 30, 2021
97,169
64,758
32,411
ended September 30, 2020 (1)
(2,285
1,801
1,754
three months ended September 30, 2020
91,676
62,675
29,001
Increase in Same Store Cash NOI
5,493
2,083
3,410
% Increase
Represents Cash NOI from discontinued operations (1899 Pennsylvania Avenue in Washington, D.C.).
57
Paramount's share of NOI for the nine months ended
2,941
(264
(1,787
4,992
Paramount's share of Same Store NOI for the nine
290,203
187,996
102,207
(11,312
(4,797
20,794
17,389
3,405
1,940
1,152
788
4,872
(254
141
4,985
320,295
213,586
106,709
(30,092
(25,590
(4,502
Represents Cash NOI attributable to the 10.0% sale of 1633 Broadway for the months in which it was not owned by us in both reporting periods.
58
Paramount's share of Cash NOI for the nine months
(406
(1,794
4,962
nine months ended September 30, 2021
281,591
189,195
92,396
(10,765
(3,889
(6,876
4,848
4,961
nine months ended September 30, 2020
275,928
189,517
86,411
Increase (decrease) in Same Store Cash NOI
5,663
(322
5,985
% Increase (decrease)
59
Funds from Operations (“FFO”) and Core Funds from Operations (“Core FFO”)
FFO is a supplemental measure of our performance. We present FFO in accordance with the definition adopted by the National Association of Real Estate Investment Trusts (“Nareit”). Nareit defines FFO as net income or loss, calculated in accordance with GAAP, adjusted to exclude depreciation and amortization from real estate assets, impairment losses on certain real estate assets and gains or losses from the sale of certain real estate assets or from change in control of certain real estate assets, including our share of such adjustments of unconsolidated joint ventures. FFO is commonly used in the real estate industry to assist investors and analysts in comparing results of real estate companies because it excludes the effect of real estate depreciation and amortization and net gains on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions. In addition, we present Core FFO as an alternative measure of our operating performance, which adjusts FFO for certain other items that we believe enhance the comparability of our FFO across periods. Core FFO, when applicable, excludes the impact of certain items, including, transaction related costs, realized and unrealized gains or losses on real estate fund investments, unrealized gains or losses on interest rate swaps, severance costs and gains or losses on early extinguishment of debt, in order to reflect the Core FFO of our real estate portfolio and operations. In future periods, we may also exclude other items from Core FFO that we believe may help investors compare our results.
FFO and Core FFO are presented as supplemental financial measures and do not fully represent our operating performance. Neither FFO nor Core FFO is intended to be a measure of cash flow or liquidity. Please refer to our consolidated financial statements, prepared in accordance with GAAP, for purposes of evaluating our financial condition, results of operations and cash flows.
The following table presents a reconciliation of net loss to FFO and Core FFO for the periods set forth below.
Reconciliation of net income (loss) to FFO and Core FFO:
Real estate depreciation and amortization (including our
share of unconsolidated joint ventures)
67,717
71,131
207,122
212,617
FFO
72,349
67,008
203,510
206,726
Less FFO attributable to noncontrolling interests in:
(13,895
(12,695
(47,422
(30,375
(3,127
(3,183
(5,009
(4,659
(13,770
(15,660
FFO attributable to common stockholders
50,318
49,733
139,135
161,982
Per diluted share
0.23
0.22
0.64
0.72
Non-core items:
Adjustments to equity in earnings for (distributions from)
contributions to an unconsolidated joint venture
(938
(498
8,977
(1,806
Consolidated real estate fund's share of after-tax net gain on
sale of residential condominium units (One Steuart Lane)
(3,267
Non-cash write-off of deferred financing costs
761
308
935
Core FFO
68,958
66,818
210,413
205,855
Less Core FFO attributable to noncontrolling interests in:
(9
(65
(4,985
(4,642
(14,677
(15,584
Core FFO attributable to common stockholders
50,069
49,560
148,249
161,187
0.68
Reconciliation of weighted average shares outstanding:
Weighted average shares outstanding
Effect of dilutive securities
44,880
6,025
41,461
14,740
Denominator for FFO and Core FFO per diluted share
218,751,236
221,467,171
218,731,157
223,608,116
60
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and interest rates. Our future earnings, cash flows and fair values relevant to financial instruments are dependent upon prevalent market interest rates. Our primary market risk results from our indebtedness, which bears interest at both fixed and variable rates. We manage our market risk on variable rate debt by entering into swap agreements to fix the rate on all or a portion of the debt for varying periods through maturity. This in turn, reduces the risks of variability of cash flows created by variable rate debt and mitigates the risk of increases in interest rates. Our objective when undertaking such arrangements is to reduce our floating rate exposure and we do not enter into hedging arrangements for speculative purposes. Subject to maintaining our status as a REIT for Federal income tax purposes, we may utilize swap arrangements in the future.
The following table summarizes our consolidated debt, the weighted average interest rates and the fair value as of September 30, 2021.
Fixed Rate Debt:
300 Mission Street
3.65%
276,450
One Market Plaza
4.03%
998,568
1633 Broadway
2.99%
1,250,339
1301 Avenue of the Americas (1)
2.46%
500,214
3.80%
517,186
Total Fixed Rate Debt
3.37%
2,250,000
3,498,000
3,542,757
Variable Rate Debt:
1301 Avenue of the Americas (2)
360,154
Total Variable Rate Debt
Total Consolidated Debt
3.40%
2,610,000
Represents variable rate loans that have been fixed by interest rate swaps through August 2024. See table below.
Represents variable rate loans, where LIBOR has been capped at 2.00% through August 2023.
In addition to the above, our unconsolidated joint ventures had $1.64 billion of outstanding indebtedness as of September 30, 2021, of which our share was $612,078,000.
The tables below provide additional details on our interest rate swaps as of September 30, 2021.
The following table summarizes our share of total indebtedness and the effect to interest expense of a 100 basis point increase in LIBOR.
(Amounts in thousands, except per share amount)
Balance
Weighted
Average
Interest
Effect of 1% Increase in Base Rates
Paramount's share of consolidated debt:
Variable rate
3,600
1.99
Fixed rate
2,687,665
3.25
2,678,781
3.36
3,047,665
3.29
3,028,781
3.20
Paramount's share of debt of non-consolidated
entities (non-recourse):
108,404
3.26
1,084
103,880
3.31
503,674
3.30
503,767
612,078
607,647
Noncontrolling interests' share of above
(424
Total change in annual net income
4,260
0.02
On March 5, 2021, the Financial Conduct Authority (“FCA”) confirmed it will cease the publication of the one-week and two-month LIBOR rates after December 31, 2021. The remaining LIBOR rates will continue to be published through June 30, 2023, after which the interest rate for our variable rate debt and derivative instruments, including interest rates for our variable rate debt and derivative instruments of our unconsolidated joint ventures, will be based on an alternative variable rate as specified in the applicable documentation governing such debt or derivative instruments or as otherwise agreed upon. While we expect LIBOR to be available in substantially its current form until at least the end of June 2023, it is possible that LIBOR may become unavailable prior to that point. The discontinuation of LIBOR and the related transition to an alternative rate would not affect our ability to borrow or maintain already outstanding borrowings or swaps, however, future changes may result in interest rates and/or payments that are higher or lower than if LIBOR were to remain available in its current form. As of September 30, 2021, all of our variable rate debt outstanding and derivative instruments are indexed to LIBOR and we will continue to monitor and evaluate the related risks.
62
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and regulations, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
As of September 30, 2021, the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of our disclosure controls and procedures. Based on the foregoing evaluation, as of the end of the period covered by this Quarterly Report, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports filed or submitted under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting in connection with the evaluation referenced above that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
From time to time, we are a party to various claims and routine litigation arising in the ordinary course of business. As of September 30, 2021, we do not believe that the results of any such claims or litigation, individually or in the aggregate, will have a material adverse effect on our business, financial position, results of operations or cash flows.
ITEM 1A.
RISK FACTORS
Except to the extent additional factual information disclosed elsewhere in this Quarterly Report on Form 10-Q relates to such risk factors (including, without limitation, the matters discussed in Part I, “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations”), there were no material changes to the risk factors disclosed in Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
None.
Recent Purchases of Equity Securities
The following table summarizes our purchase of equity securities in the three months ended September 30, 2021.
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plan
Maximum Approximate Dollar Value Available for Future Purchase
July 2021
80,000,000
August 2021
September 2021
1,566
9.16
Represents shares of common stock surrendered by employees for the satisfaction of tax withholding obligations in connection with the vesting of restricted common stock.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
ITEM 4.
MINE SAFETY DISCLOSURES
ITEM 5.
OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibits required by Item 601 of Regulation S-K are filed herewith or incorporated herein by reference and are listed in the following Exhibit Index:
EXHIBIT INDEX
ExhibitNumber
Exhibit Description
31.1*
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.SCH*
Inline XBRL Taxonomy Extension Schema.
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase.
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase.
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase.
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase.
104*
Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101.)
_______________________________
*
Filed herewith
**
Furnished herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Paramount Group, Inc.
Date:
October 27, 2021
By:
/s/ Wilbur Paes
Chief Operating Officer, Chief Financial Officer and Treasurer
Wilbur Paes
(duly authorized officer and principal financial officer)
/s/ Ermelinda Berberi
Senior Vice President, Chief Accounting Officer
Ermelinda Berberi
(duly authorized officer and principal accounting officer)